Business

Saturday August 1, 2009

Big lesson in corporate direction

Review by ERROL OH


How The Mighty Fall: And Why Some Companies Never Give In
Author: Jim Collins
Publisher: HarperCollins

IT’S utterly fitting that Jim Collins has come up with this book. He is best known as the author of business classics Built To Last and Good To Great – the first is about visionary companies, and the other about how companies achieve greatness – and How The Mighty Fall is an ideal companion title.

After all, if you’ve made a name for yourself writing about the rise to corporate heights, the logical next step is to focus on what is it that knock companies off their lofty perches.

And isn’t it apt that How The Mighty Fall was published amid the carnage of the global financial crisis? Collins certainly knows a thing or two about timing and opportunity.

In fact, he was working on another book, about surviving turmoil, when he set out to write an article as “a diversion to engage my pen”. That project proved larger than initially thought and he considered putting it on hold until the turbulence book was finished.

Then, Wall Street giants such as Bear Stearns, Lehman Brothers, Fannie Mae and Merrill Lynch began crumbling. Suddenly, there’s heightened urgency in trying to understand how even longtime industry leaders can slide towards oblivion; in other words, the market has turned ripe for How The Mighty Fall.

In many ways, the book does not disappoint those who expect more of the approach employed in Built To Last and Good To Great, that is, one that’s built upon research, driven by firm concepts and enriched by case studies.

The work was geared towards answering one question: “If some of the greatest companies in history can collapse from iconic to irrelevant, what might we learn by studying their demise, and how can others avoid their fate?”

Collins and his colleagues started with 60 corporations drawn from the research database that supported Built To Last and Good To Great. Using certain criteria to identify companies that have truly risen and fallen, the list was whittled down to 11.

These include global brands such as Motorola, Hewlett-Packard and Rubbermaid, and others whose names don’t ring a bell with most people (anybody heard of Addressograph?).

After studying these 11 companies, Collins has assembled a “data-driven framework of decline”, which shows that the descent from corporate greatness generally occurs in five stages – Hubris Born of Success, Undisciplined Pursuit of More, Denial of Risk and Peril, Grasping for Salvation, and Capitulation to Irrelevance or Death.

A key argument here is that this roadmap can help companies recognise that they are going downhill, and thus give them a chance to reverse the rot. “So long as you never fall all the way to Stage 5, you can rebuild a great enterprise worthy of lasting,” Collins wrote. He offers three such cases – IBM, Nucor and Nordstrom.

He also contends that the companies mostly have themselves to blame for their decline.

At Stage 1, for example, companies are typically arrogant, believing that they will continue to do well no matter what they do. They neglect the core features that make them successful. They forget to learn and thus lose sight of the importance of understanding why they are top dogs.

Of course, it gets worse in the next stage. Pressured to register further growth, the companies become reckless and overreaching. They make bad big moves and fail to have enough people in key positions.

The pattern of self-destructive behaviour worsens. By refusing to acknowledge that they are heading for disaster, the companies are only hastening their fall. And when they finally wake up to the fact that they are in trouble, panic sets in and it gets harder to remedy the situation.

Beyond that, it’s the end of the road. As Collins puts it: “Not all companies deserve to last.”

The final chapter of this slim volume – only 123 pages, minus the appendices, notes and index – is meant to remind that there’s always hope and that genuinely great companies can fall and recover. It’s more a pep talk than a how-to guide.

Then again, How The Mighty Fall is essentially a manual for diagnosis, not an encyclopaedia of cures. The book works best as a quick reference to the symptoms of corporate failure. With the benefit of hindsight and analysis, the case studies are well-chosen and illustrative.

Many of the markers of the stages of decline are familiar to us, but knowing that Collins has sifted through a lot of data before identifying them, we can rely comfortably on these markers to spot warning signs even if a company appears to be performing perfectly.

If this book teaches us anything, it’s to not take success for granted, for that will likely lead us to a mighty fall.

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